The following questions are based on the case Merger Arbitrage at Tannenberg Capital

a. In 2016, Tannenberg had allocated 35% of its capital to merger arbitrage strategies. What are the market forces that might make merger arbitrage an attractive investment strategy? Do you think that Tannenberg should increase or decrease its allocation to merger arbitrage?

b. Are Baxaltas shares mispriced relative to Shires shares? What forces are generating this relative mispricing, if one exists? How confident are you that mispricing is real?

c. Suppose Kohl and Jensen wanted to devote $100 million of capital to an unlevered merger arbitrage trade betting that the Shire-Baxalta merger would be completed. What positions should they take? What is the gross deal spread associated with his trade? The net deal spread? Based on this net deal spread and the downside estimate in case Exhibit 9, what is the market-implied break-even probability of deal failure?